The U.K. Banking Crisis

Abstract

As in many other countries, the banking market in the U.K. has undergone radical transformation since the onset of the mid-2007 credit crisis. What was once a profitable, innovative, and dynamic industry has virtually collapsed and now major banks are state owned, the government has had to inject massive funds to support lending, and a crisis has ensued. The collapse of global real estate markets prompted by the U.S. sub-prime crisis, is usually put down as the main causes of the crisis. Also, excessive risk-taking by banks and inappropriate governance structures have been highlighted as other major factors that led to the meltdown. Of course, the environment that led up to these problems had been created over the last 25 years and was mainly driven by domestic deregulation as well as various other forces that changed the supply-and-demand characteristics of the financial services industry. In this context, this chapter aims to review the structural features of the U.K. banking industry, including an analysis of the credit crisis and how it unravelled. We then review the recent performance of U.K. banks and illustrate that up to 2006–2007, they were among Europe’s best-performing financial firms. However, the returns of major U.K. banks collapsed in 2008 (e.g., RBS made a loss of minus 43%!). Finally we focus on the regulatory environment, with particular attention on recent changes and their impact on the sector.